<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- ---------
Commission File Number: 0-21142
NEMATRON CORPORATION
(Exact name of small business issuer as specified in its charter)
MICHIGAN 38-2483796
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5840 INTERFACE DRIVE, ANN ARBOR, MICHIGAN 48103
(Address of principal executive offices) (Zip Code)
(734) 214-2000
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[ X ] YES [ ] No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
No par value Common Stock: 12,605,430 SHARES OUTSTANDING AS OF AUGUST 10, 1999
Transitional Small Business Disclosure Format: [ ] YES [X] NO
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 90,074 $ 106,730
Accounts receivable, net of allowance for doubtful
accounts of $142,000 at June 30, 1999, and
$368,000 at December 31, 1998 3,151,572 1,999,900
Inventories (Note 2) 1,699,337 1,884,335
Prepaid expenses and other current assets 336,696 305,310
------------ ------------
Total Current Assets 5,277,679 4,296,275
Property and Equipment, net of accumulated depreciation
of $5,889,994 at June 30, 1999 and $5,685,402 at
December 31, 1998 2,868,412 3,344,140
Other Assets:
Software and related development costs, net of amortization
of $3,034,225 at June 30,1999, and $2,557,639 at
December 31, 1998 3,597,204 3,880,284
Other intangible assets, net of amortization of $2,291,464 at
June 30, 1999 and $2,225,842 at December 31,1998 845,862 942,158
------------ ------------
Net Other Assets 4,443,066 4,822,442
------------ ------------
Total Assets $ 12,589,157 $ 12,462,857
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable to bank (Note 4) $ 2,032 $ 2,715,457
Accounts payable 1,996,645 1,409,645
Trade notes payable 217,067 1,123,956
Other accrued expenses 1,427,153 1,387,403
Convertible promissory notes payable (Note 3) -0- 1,000,000
Current maturities of long-term debt (Note 4) 1,564,185 1,576,492
------------ ------------
Total Current Liabilities 5,207,082 9,212,953
Long-Term Debt, less current maturities (Note 4) 1,807,067 2,182,783
Deferred Tax Liability 156,600 178,200
------------ ------------
Total Liabilities 7,170,749 11,573,936
Stockholders' Equity:
Common stock, no par value, 30,000,000 shares authorized; 12,525,430 and
5,353,316 shares issued and outstanding at June 30, 1999 and at
December 31, 1998,
respectively (Notes 3 and 8) 28,707,838 24,664,809
Foreign currency translation adjustment (9,817) (7,134)
Accumulated deficit (23,279,613) (23,768,754)
------------ ------------
Total Stockholders' Equity 5,418,408 888,921
------------ ------------
Total Liabilities and Stockholders' Equity $ 12,589,157 $ 12,462,857
============ ============
</TABLE>
1
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE-AND SIX-MONTH PERIODS
ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Revenues $ 5,948,709 $ 3,767,727 $ 11,755,035 $ 8,711,178
Cost of Revenues 4,105,463 3,228,892 8,041,688 6,635,385
------------ ------------ ------------ ------------
Gross Profit 1,843,246 538,832 3,713,347 2,075,793
Operating Expenses:
Product development costs 192,094 268,225 383,445 501,962
Selling, general and
administrative expenses 1,318,085 2,491,062 2,542,606 4,851,702
------------ ------------ ------------ ------------
Total Operating Expenses 1,510,179 2,759,287 2,926,052 5,353,034
------------ ------------ ------------ ------------
Operating Income (Loss) 333,067 (2,220,455) 787,295 (3,277,241)
Other Income (Expense):
Interest expense (67,516) (179,522) (317,366) (339,648)
Sundry income (expense) -0- 20,829 (2,388) 35,153
----------- ------------ ------------ -----------
Total Other Income (Expense) (67,516) (158,693) (319,754) (304,495)
----------- ------------ ------------ ------------
Income (Loss) Before Taxes 265,351 (2,379,148) 467,541 (3,581,736)
Income Tax Benefit (Note 5) 10,800 35,715 21,600 107,144
------------ ------------ ------------ ------------
Net Income (Loss) $ 276,351 $ (2,343,433) $ 489,141 $ (3,474,592)
============ ============ ============ ============
Per Share Amounts (Note 6):
Basic $ 0.02 $ (0.44) $ 0.06 $ (0.65)
============ ============ ============ ============
Diluted $ 0.02 $ (0.44) $ 0.04 $ (0.65)
============ ============ ============ ============
Weighted Average Shares
Outstanding (Note 6):
Basic 12,097,342 5,352,767 8,874,221 5,347,583
============ ============ ============ ============
Diluted 13,159,568 5,352,767 11,867,751 5,347,583
============ ============ ============ ============
</TABLE>
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE-AND SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) $ 276,351 $(2,343,433) $ 489,141 $(3,474,592)
Other comprehensive income -
equity adjustment from
foreign translation (5,565) (7,575) (2,683) (94)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 270,786 $(2,351,008) $ 486,458 $(3,474,686)
=========== =========== =========== ===========
</TABLE>
2
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 489,141 $(3,474,592)
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities:
Depreciation and amortization 1,134,248 1,256,868
Deferred income tax benefit (21,600) (107,143)
Loss on disposal of property 15,200 -0-
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (1,151,672) 1,003,831
Inventories 184,998 820,462
Prepaid expenses and other current assets (31,386) (10,508)
Accounts payable 587,000 1,512,014
Accrued expenses 54,445 64,208
----------- -----------
Net Cash Provided By Operating Activities 1,260,374 1,065,140
----------- -----------
Cash Flows From Investing Activities:
Additions to capitalized software development costs (202,506) (941,968)
Additions to property and equipment, net of minor disposals (74,528) (138,037)
Proceeds from disposals of property and equipment 12,490 -0-
----------- -----------
Net Cash Used In Investing Activities (264,544) (1,080,005)
----------- -----------
Cash Flows From Financing Activities:
Net proceeds from stock subscriptions 1,520,000 -0-
Proceeds from common stock subscriptions 1,500,000 -0-
Increase (decrease) in note payable to bank (2,713,425) 637,000
Payment of trade notes payable (906,889) -0-
Payments of long-term debt (332,489) (367,508)
Payment of deferred financing fees (77,000) -0-
Proceeds from exercise of options and warrants -0- 33,905
----------- -----------
Net Cash Provided By (Used In) Financing Activities (1,009,803) 303,397
----------- -----------
Foreign Currency Translation Effect (2,683) (94)
----------- -----------
Net Increase (Decrease) In Cash and Cash Equivalents (16,656) 288,438
Cash and Cash Equivalents at Beginning of Period 106,730 454,765
----------- -----------
Cash and Cash Equivalents at End of Period $ 90,074 $ 743,203
=========== ===========
Non-Cash Financing and Investing Activities:
Conversion of stock subscriptions to common stock $ 1,500,000 -0-
Increase in common stock from conversion of
convertible promissory notes (Note 3) $ 1,023,029 -0-
Decrease in long-term debt and property resulting from
adjustment of purchase price $ 55,534 -0-
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 295,616 $ 340,673
Cash paid for income taxes -0- -0-
</TABLE>
3
<PAGE> 5
ITEM 1. FINANCIAL STATEMENTS - CONTINUED
NEMATRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-AND SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Nematron Corporation (the "Company") and its wholly-owned subsidiaries, Nematron
Ltd., a United Kingdom corporation, and NemaSoft, Inc. ("NemaSoft") and
Imagination Systems, Inc., ("ISI") both Michigan corporations. All significant
intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial statements for the interim periods have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-KSB and amendments
thereto, and in the transition report for the three months ended December 31,
1998.
Certain reclassifications have been made to the fiscal 1998 presentation to
conform to classifications used in fiscal 1999.
The Company has changed its fiscal year end from September 30 to December 31,
and filed a transition report for the three month period ended December 31,
1998.
The results of operations for the three- and six-month periods ended June 30,
1999 and 1998 are not necessarily indicative of the results to be expected for
the full year.
NOTE 2 - INVENTORIES
Inventories consist of the following at June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
<S> <C> <C>
Purchased parts and accessories $1,279,845 $1,142,431
Work in process 151,319 307,762
Finished goods, demo units and service stock 268,173 434,142
---------- ----------
Total Inventory $1,699,337 $1,884,335
========== ==========
</TABLE>
NOTE 3 - CONVERTIBLE PROMISSORY NOTES
In December 1998, the Company issued convertible promissory notes (the
"Notes") in the aggregate principal amount of $1 million with 18 investors in a
private placement (collectively, the "Note Holders") as the first stage of a
capital transaction, under which the Company raised a total of approximately $4
million of equity. The Notes bore interest at the rate of seven percent (7%) per
annum, were due and payable, with accrued interest, on the later of March 31,
1999 or 5 days following the date of shareholder approval of the capital
transaction. The Notes were not transferable without the Company's consent. The
Notes and accrued interest thereon were convertible by
4
<PAGE> 6
the Note Holders into Common Stock at $0.25 per share (the "Conversion Price").
In February and March 1999, certain Note Holders converted $169,863 of Notes and
received 679,450 shares of Common Stock. On April 7, 1999, following shareholder
approval of the capital transaction on April 6, 1999, the remaining $830,137 of
Notes and $23,029 of accrued interest thereon were converted into 3,412,664
shares Common Stock.
NOTE 4 - SHORT-TERM AND LONG-TERM DEBT
The Company has entered into various amendments, through April 23, 1999, to the
September 1998 loan agreements with its primary bank lender which provide, among
other things, for a modification of certain terms of the Term Note, two
Equipment Notes and a Revolving Credit Note (the "Bank Agreements").
Under the terms of the Bank Agreements, the amount available under the Revolving
Credit Note was reduced from $5,000,000 to $4,000,000 on April 7, 1999,
following the private placement of common stock on the same date. The credit
availability is limited by a borrowing formula which allows for advances up to a
maximum of the sum of 80% of eligible domestic and foreign accounts receivable,
plus 35% of inventory, less the amount of letters of credit issued by the
Company. Prior to the private placement, the formula also included a Permitted
Overadvance of $1,100,000. The interest rate on the credit line borrowings is at
the bank's prime interest rate plus 2.0% (9.75% effective rate at June 30,
1999). Amounts borrowed under the line of credit are due in full on October 31,
1999. The Company intends to replace the current Bank Agreements with a
borrowing arrangement, on terms no less restrictive than the current Bank
Agreements, with a different senior bank lender prior to October 31, 1999.
Long-term debt includes the following debt instruments at June 30, 1999, and
December 31, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
<S> <C> <C>
Mortgage loan payable to bank $ 1,869,318 $ 1,956,474
Term note payable 1,020,000 1,170,000
Capitalized lease obligations and other notes 476,564 632,801
----------- -----------
Total long-term debt 3,364,882 3,759,275
Less current maturities (1,564,185) (1,576,492)
----------- -----------
Long-term debt, less current maturities $ 1,807,067 $ 2,182,783
=========== ===========
</TABLE>
The mortgage loan agreement contains covenants that require the Company to
maintain a minimum tangible net worth and a minimum debt-to-equity ratio. The
Company is not in compliance with these covenants; however, the Company's
mortgage lender has waived these defaults through October 1, 1999.
The Bank Agreements include various affirmative and negative covenants, the most
restrictive of which are the prohibition of dividend payments and a requirement
to maintain a specified level of adjusted net income, as defined. The Company is
in compliance with these restrictive covenants. The borrowings under the Bank
Agreements are due October 31, 1999. All borrowings under the Bank Agreements,
totaling $1,269,420 and $1,487,017 at June 30, 1999 and December 31, 1998,
respectively, are included in current maturities of long-term debt. The Company
intends to replace these borrowings with a new lender prior to the expiration
date of the Bank Agreements.
NOTE 5 - TAXES ON INCOME
The current tax benefit computed for the three- and six-month periods ended June
30, 1999 and 1998 reflect the tax benefit associated with the amortization of
non-deductible goodwill and other intangible assets during the same periods.
5
<PAGE> 7
The Company has net operating loss carryforwards ("NOLs") of approximately
$19,400,000, which may be applied against future taxable income. The NOLs expire
beginning 2003 and run through 2013. Utilization of these NOLs is subject to
annual limitations under current Internal Revenue Service regulations. The
Company has established a valuation allowance for the estimated amount of the
total limitation on the utilization of the NOLs.
NOTE 6 - EARNINGS PER SHARE
Earnings per share ("EPS") for the three- and six-month periods ended June 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIOD ENDED JUNE 30,
-----------------------------------------
1999 1998
----------------------------------------------------------------------------------
Income Per Income Per
(Loss) Shares Share (Loss) Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Net income (loss) $ 276,351 12,097,342 $ 0.02 $(2,343,433) 5,352,797 $ (0.44)
EFFECT OF DILUTIVE SECURITIES:
Convertible promissory
notes 2,106 318,954 0.00
Options 743,272 0.00 -0- -0- 0.00
----------- ----------- -------- ----------- ----------- ----------
DILUTED EPS:
Net income available
to common shareholders $ 278,457 13,159,568 $ 0.02 $(2,343,433) 5,352,797 $ (0.44)
=========== =========== ======== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED JUNE 30,
---------------------------------------
1999 1998
----------------------------------------------------------------------------------
Income Per Income Per
(Loss) Shares Share (Loss) Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Net income (loss) $ 489,141 8,874,221 $ 0.06 $(3,474,592) 5,347,583 $ (0.65)
EFFECT OF DILUTIVE SECURITIES:
Convertible promissory
notes 24,946 2,513,815 (0.01)
Options -0- 479,715 (0.01) -0- -0- 0.00
----------- ----------- ----------- ----------- --------- --------
DILUTED EPS:
Net income available
to common shareholders $ 514,087 11,867,751 $ 0.04 $(3,474,592) 5,347,583 $ (0.65)
=========== =========== =========== =========== ========= ========
</TABLE>
6
<PAGE> 8
For the three-month period ended June 30, 1999, 478,856 options and 322,676
warrants were outstanding but were not included in the computation of diluted
EPS because the exercise prices of the excluded options and warrants were
greater than the average market price of the common shares during the period.
These options expire on various dates between 2003 and 2009, and the warrants
expire between February 2000 and October 2002. For the three month period ended
June 30, 1998, 860,754 options and 322,676 warrants were outstanding but were
not included in the computation of diluted EPS because the inclusion of these
securities would have an antidilutive effect on loss per share during the
three-month period ended June 30, 1998. These options expire on various dates
between 2003 and 2009, and these warrants expire between February 2000 and
October 2002.
For the six-month period ended June 30, 1999, 865,747 options and 322,676
warrants were outstanding but were not included in the computation of diluted
EPS because the exercise prices of the excluded options and warrants were
greater than the average market price of the common shares during the period.
These options expire on various dates between 2003 and 2009, and the warrants
expire between February 2000 and October 2002. For the six- month period ended
June 30, 1998, 860,754 options and 322,676 warrants were outstanding but were
not included in the computation of diluted EPS because the inclusion of these
securities would have an antidilutive effect on loss per share during the
six-month period ended June 30, 1998. These options expire on various dates
between 2003 and 2009, and these warrants expire between February 2000 and
October 2002.
In July 1999, the Company issued a total of 80,000 shares of Common Stock in
connection with the exercise of outstanding options, all of which have been
accounted for in the diluted EPS computation for the three- and six-month
periods ended June 30, 1999. Additionally, in July 1999, the Company issued a
total of 615,850 options and option holders forfeited a total of 203,000
options. None of the newly issued options or the forfeited options would have
been included in the diluted EPS computation for the three- or six-month periods
ended June 30, 1999.
NOTE 7 - CONTINGENCIES
On May 8, 1998, a lawsuit was filed against the Company in the District
Court for the Southern District of New York, and in December 1998, the case was
transferred to the United States District Court for the Eastern District of
Michigan. The lawsuit named as defendants the Company, certain of its officers
and directors, its former independent auditor and the underwriter for the
Company's initial public offering. Plaintiffs claimed that the defendants
violated securities laws and common law based on allegations that defendants
made untrue statements of material facts and that they omitted material facts
necessary in order to make the statements not misleading. The complaint sought
unspecified damages and costs. In April 1999, the Court granted the Company's
motion to dismiss the suit, and the time period allowed for plaintiffs' appeal
has expired.
NOTE 8 - CHANGES IN COMMON STOCK AUTHORIZED, ISSUED AND OUTSTANDING
On April 6, 1999 the Company's shareholders approved a two stage
capital transaction. Stage one included the issuance of $1,000,000 of
Convertible Notes, as described in Note 3 above, and stage two included the
exercise of options included in such Notes and the private placement of
securities. In February and March 1999, certain note holders converted $169,863
of Notes and received 679,450 shares of Common Stock. Following shareholder
approval, the remaining $830,137 of Notes and $23,029 of accrued interest
thereon were converted into 3,412,664 shares of Common Stock. As a result of the
completion of the first stage of the capital transaction, a total of 4,092,114
shares of Common Stock were issued. On April 6, 1999, the Company completed the
second stage of the capital transaction. As a result thereof, the Company issued
a total of 3,080,000 shares of Common Stock at $1.00 per share upon the exercise
of the options and the private placement. (See Note 3).
On April 6, 1999, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to increase the number of authorized
shares of Common Stock from 15 million to 30 million.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
THREE- AND SIX - MONTH PERIODS ENDED JUNE 30, 1999 COMPARED WITH THE
THREE- AND SIX - MONTH PERIODS ENDED JUNE 30, 1998
Net revenues for the three- and six-month periods ended June 30, 1999
increased $2,181,000 (57.9%) and $3,044,000 (34.9%), respectively, to $5,949,000
and $11,755,000, respectively, compared to the same periods last year. The
revenue increases are primarily attributable to increases in sales of bundled
Industrial Control Computers under a major supply program with a major
automotive company, partially offset by slightly lower sales of software
products. Management expects that net revenues for the last six months of 1999
will also increase compared to the year earlier period, based on existing
scheduled production releases, expected shipments under the current supply
contract and the current backlog.
Gross profits for the three- and six-month periods ended June 30, 1999
increased $1,304,000 (242.17%) and $1,638,000 (78.9%), respectively, to
$1,843,000 and $3,713,000, respectively, compared to the same periods last year.
Gross profit as a percentage of net revenues for the three- and six-month
periods ended June 30, 1999 were 31.0% and 31.6%, respectively, compared to
14.3% and 23.8% in the same periods last year. The improvement in gross profit
percentage results from both fixed cost and variable product cost reductions and
from a higher percentage of sales of higher margin bundled hardware/software
products in the current periods compared to the same periods last year.
Management expects that gross profit margins will remain relatively constant
throughout the year as the mix of sales in the remaining quarters of 1999 is
expected to be similar to the sales mix experienced in the first six months of
the year, based on the current backlog.
Product development expenses for the three- and six-month periods ended
June 30, 1999 decreased $76,000 (28.4%) and $119,000 (23.6%), respectively, to
$192,000 and $383,000, respectively, compared to the same periods last year. The
decrease is attributable to a smaller development staff and reduced development
efforts in the current periods compared to a year ago. Management expects that
product development expenses will increase slightly in the remaining quarters of
1999 as staff and development efforts are planned to increase above current
levels to develop and release new products in 1999 and 2000.
Selling, general and administrative expenses for the three- and
six-month periods ended June 30, 1999 decreased $1,173,000 (47.1%) and
$2,308,000 (47.6%) to $1,318,000 and 2,543,000, respectively, compared to the
comparable periods last year. Together with product development costs, these
operating expenses decreased as a percentage of net revenue to 25.4% and 24.9%
for three- and six-month periods ended June 30, 1999, compared to 73.2% and
61.5% in the comparable periods last year. The decrease in selling, general and
administrative expenses resulted primarily from lower staff levels, the effects
of closing of satellite offices during the last nine months, and the effects of
cost controls during the current periods. Management expects that selling,
general and administrative expenses will increase in the remaining quarters of
1999 because of expanded marketing and sales activities, but that such expenses
will decrease as a percentage of net revenues as net revenues are expected to
increase by a greater amount than the expense increase for the remaining
quarters of 1999.
Interest expense for the three- and six-month periods ended June 30,
1999 decreased $112,000 (62.4%) and $22,000 (6.6%), respectively, to $68,000 and
$317,000, respectively, compared to $180,000 and $340,000 for the comparable
periods last year. These decreases result from lower average borrowing levels,
most notably in the three-month period ended June 30, 1999 because of the
paydown of line of credit borrowings following the April 6, 1999 capital
infusion.
Sundry expenses for the three- and six-month periods ended June 30,
1999 and 1998 were not significant for any period presented.
8
<PAGE> 10
YEAR 2000 ISSUE
The Year 2000 Issue ("Y2K") is the result of certain computer programs
being written using two digits rather than four digits to define the applicable
year. Computer systems with a Y2K problem will be unable to interpret dates
beyond the year 1999, which could cause a system failure or other computer
errors, leading to disruptions in operations. In 1997, the Company began to
assess its Y2K readiness and adopted a three-phase program for Y2K information
systems compliance. Phase I is the identification of systems and products with
which the Company has exposure to Y2K issues. Phase II encompasses the
development and implementation of action plans to be Y2K compliant in all areas
by mid-1999. Phase III includes final testing of each major area of exposure to
ensure compliance. The Company has identified four major areas determined to be
critical for successful Y2K compliance: (1) financial and information system
applications; (2) software products currently sold; (3) third-party
relationships and 4) non-information technology areas such as security,
telephone systems and climate control systems.
The Company has finished Phase I of its program. The Company has
contacted all significant software suppliers and, because of recent purchases of
its major financial and operational software, believes that its financial and
operational software is Y2K compliant. The Company has also reviewed its
financial and information system applications, as well as its hardware and
software products for Y2K compliance, including the firmware embedded in certain
hardware products. The Company has determined that its major financial and
operational software and the systems used in non-information technology areas,
such as security, telephone systems and climate control systems, are Y2K
compliant. The Company has used its employee engineers and others in its review
and testing procedures.
The Company has one older software product, used by purchasers of the
product for monitoring and testing in a test cell environment (not related to
machine control) which had to be modified to correct a Y2K problem. The
modification has been completed at a cost of approximately $30,000, all of which
related to the salary and benefits of software development employees of the
Company, and such cost was funded from working capital. The Company has notified
its customers that a solution is currently available for purchase.
The Company has relationships with, and is to varying degrees dependent
upon, various third parties that provide funds, information, goods and services
to the Company. These include the Company's bank lender, utility providers,
stock transfer agent, and suppliers of components. The Company is attempting,
through informal contacts, to assess the compliance of these third parties.
While not all parties have informed the Company as to their status, the most
significant of these third parties have represented that their systems and
products are Y2K compliant. The Company will continue with this assessment in
the next two quarters of 1999. The Y2K compliance of the systems of these third
parties is outside the Company's control and there can be no assurance that
these third parties will be Y2K compliant.
Because the Company expects that the systems within its control will be
Y2K compliant before the end of 1999, the Company believes that the most
reasonably likely worst case scenario is a compliance failure by one or more of
the third parties described above. Such a failure would likely have an effect on
the Company's business, financial condition and results of operations. The
magnitude of that effect, however, cannot be quantified at this time because of
variables such as the type and importance of the third party, the possible
effect on the Company's operations and the Company's ability to respond. Thus,
there can be no assurance that there will not be a material adverse effect on
the Company if such third parties do not remediate their systems in a timely
manner and in a way that is compatible with the Company's systems.
As a result, the Company will develop contingency plans that assume
some estimated level of noncompliance by, or business disruption to, these third
parties. The Company intends to have contingency plans developed by the end of
the third quarter of 1999 for third parties determined to be at high risk of
noncompliance or business disruption or whose noncompliance or disruption, while
not high risk, is considered likely to materially affect the Company. The
contingency plans will be developed on a case-by-case basis, and may include
plans for switching to Y2K compliant suppliers.
9
<PAGE> 11
Judgments regarding contingency plans are subject to many uncertainties
and there can be no assurance that the Company will correctly anticipate the
level, impact or duration of noncompliance or that its contingency plans will be
sufficient to mitigate the impact of any noncompliance. Some material adverse
effect to the Company may result despite such contingency plans.
To date, the Company has expended approximately $55,000 in incremental
costs to assess and remediate Y2K problems. Existing engineering and application
support and other Company personnel have expended these efforts. These costs
have been expensed as incurred. The Company estimates additional Y2K remediation
costs of $15,000 incrementally over the next two quarters. Estimates of time,
cost and risks are based on currently available information. Developments that
could affect estimates include, without limitation, the availability of trained
personnel, the ability to locate and correct all noncompliant systems,
cooperation and remediation success of third parties material to the Company,
and the ability to correctly anticipate risks and implement suitable contingency
plans in the event of system failures at the Company or third parties.
LIQUIDITY AND CAPITAL RESOURCES
The Company is party to a series of agreements with its primary bank
lender under which it has a term note, two equipment notes and a bank line of
credit. The bank line of credit permits borrowing up to $4,000,000, subject to
an availability formula based upon a percentage of eligible accounts receivable
and inventory, reduced by letters of credit issued by the Company. At July 31,
1999, approximately $475,000 was outstanding on the line, $2,000,000 is reserved
in connection with a letter of credit issued to a contract manufacturer, and the
additional line availability was approximately $850,000. The expiration date of
the line of credit has been extended to October 31, 1999. Amounts borrowed under
the facility bear interest at prime plus 2.0% (9.75% effective rate at June 30,
1999).
Prior to the expiration of the line of credit on October 31, 1999, the
Company plans to change senior lenders and establish a line of credit
with a higher borrowing limit. Based on proposals received from interested
potential senior lenders, the Company is confident that a new senior lender
relationship will be established, and the new agreements will be on terms no
less favorable than current terms. However, there is no assurance that the
Company will accept any of the several senior lender proposals, or if it does,
that the borrowing facilities will be established between the Company and any
potential senior lender.
As of June 30, 1999, the Company has cash of $90,000 and total working
capital of $832,000. Based upon existing working capital, the existing borrowing
arrangements, the opportunities to replace its current senior lender, and
forecasted revenue and expense levels, management believes that it has
sufficient liquidity to satisfy its liabilities as they become due.
UNCERTAINTIES RELATING TO FORWARD LOOKING STATEMENTS
"Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations" includes "forward-looking statements" (as defined in
the federal securities laws) based on current management expectations. Factors
that could cause future results to differ from these expectations include the
failure of the Company to secure a replacement senior lender, the decline of
economic conditions in general and conditions in the automotive manufacturing
industry in particular, a reduction in demand for the Company's products and
services, decreases in orders under existing contracts, the inability of the
Company to successfully implement its strategy to lead the industrial automation
market migration from closed architecture PLCs to open architecture PC-based
solutions, changes in Company strategy, reductions in product life cycles,
competitive factors (including the introduction or enhancement of competitive
products), pricing pressures which result in materially reduced selling prices
for the Company's products, shifts in sales mix to less profitable products, raw
material price increases or unavailability, delays in introduction of planned
hardware and software products, software defects and latent technological
deficiencies in new products, changes in operating expenses, fluctuations in
foreign exchange rates, the inability to attract or retain sales, marketing and
engineering talent, changes in customer requirements, unexpected Y2K issues in
the Company's products or systems, evolving industry standards, and any
additional factors described in the Company's other reports filed with the
Securities and Exchange Commission.
10
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 1998, a lawsuit was filed by certain shareholders against the
Company in the District Court for the Southern District of New York, and in
December 1998, the case was transferred to the United States District Court for
the Eastern District of Michigan. The lawsuit named as defendants the Company,
certain of its officers and directors, its former independent auditor and the
underwriter for the Company's initial public offering. Plaintiffs claimed that
the defendants violated securities laws and common law based on allegations that
defendants made untrue statements of material facts and that they omitted
material facts necessary in order to make the statements not misleading. The
complaint sought unspecified damages and costs. In April 1999, the Court granted
the Company's motion to dismiss the suit, and the time period allowed for
plaintiffs appeal has expired.
On March 3, 1999, the Company filed suit in United State District Court
for the Eastern District of Virginia - Norfolk Division. The suit was filed
against the Company's former president, Mr. Frank Logan, and Chesapeake Bay
Systems ("CBS"), a newly established entity controlled by Mr. Logan, seeking a
preliminary injunction requiring CBS to deliver to Nematron certain software and
other materials owned by Nematron, and seeking damages related to a breach of
contract by CBS, a breach of fiduciary duty by Mr. Logan, and tortious
interference with a contract by Mr. Logan and CBS. On April 8, 1999, Mr. Logan
and CBS filed a counterclaim against the Company and its president in the same
court alleging tortious interference by certain directors and officers of
Nematron with a contract between Mr. Logan, CBS and Nematron, and that Nematron
and the Company's current president committed acts of libel and defamation of
Mr. Logan. The damages and punitive awards sought by Mr. Logan and CBS exceeded
$1 million. Mr. Logan and CBS filed a similar libel and defamation action in the
Circuit Court for the City of Virginia Beach, Virginia on or about April 5,
1999. By March 31, 1999, CBS delivered to Nematron all software and other
materials demanded by Nematron. On June 30, 1999, the parties agreed to settle
all litigation, and the courts dismissed such legal actions in July 1999. The
settlement awards to the parties were insignificant.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Following the receipt of shareholder approval on April 6, 1999 of a
proposal to increase the number of authorized shares of Common Stock,
the Company filed with the State of Michigan an amendment to its
Article of Incorporation to increase the authorized shares of Common
Stock from 15 million to 30 million.
(c) On April 7, 1999, following the receipt of shareholder approval, the
Company issued 3,080,000 shares of its Common Stock in a private
placement transaction for a total of $3,080,000 in cash. The Company
issued the Common Stock to accredited investors, including investment
funds, wealthy individuals and directors of the Company, without
registration under the Securities Act of 1933, as amended (the "Act"),
in reliance upon Section 4(2) of the Act and Regulation D promulgated
thereunder. The Company relied upon this exemption based upon the
limited number of purchasers, the provision of financial and other
information concerning the Company to the purchasers, investment
representations made by the purchasers, the lack of general
solicitation, and actions taken by the Company to restrict resale of
the securities without registration, including the placement of
restrictive legends on the share certificates.
In addition, on April 7, 1999 the Company issued 3,412,664 shares of
its Common Stock at $.25 per share upon conversion by the holders of
$3,320,550 principal amount of its convertible promissory notes issued
as of December 1, 1998 and $92,114 of accrued interest on such notes.
The Company issued the Common Stock without registration under the Act
in reliance upon Section 3(a)(9) of the Act. The Company relied upon
this exemption because the issuance was an exchange of securities
exclusively with its existing security holders and no commission or
other remuneration was paid or given directly or indirectly for
soliciting the exchange.
In connection with the private placement of Common Stock and
convertible promissory notes, the Company issued to its placement
agent, Gregory J. Schwartz and Company, effective April 6, 1999, an
option to purchase 80,000 shares of Common Stock at $.25 per share at
any time prior to April 30, 2009 and an option to purchase 80,000
shares of Common Stock at $1.00 per share at any time prior to April
30, 2009. The Company issued the options without registration under the
Securities Act of 1933, as amended (the "Act"), in reliance upon
Section 4(2) of the Act. The Company relied upon this exemption based
upon the limited number of purchasers, the provision of financial and
other information concerning the Company to the purchaser, investment
representations made by the purchaser, the lack of general
solicitation, and actions taken by the Company to restrict resale of
the options and the shares to be acquired upon exercise thereof,
including the placement of restrictive legends on the share
certificates to be issued upon exercise.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 6, 1999, the Company held its Annual Meeting of Shareholders. There
were five matters voted on, which were the 1) the election of directors; 2)
approval of the potential issuance of approximately 7.3 million shares of Common
Stock pursuant to a capital raising transaction; 3) approval of a proposal to
amend the Articles of Incorporation to increase the number of authorized shares
of Common Stock from 15 million to 30 million; 4) approve a proposal to amend
the Article of Incorporation to declassify the Board of Directors and reduce the
terms for directors from three years to one year; and 5) approve the Nematron
Corporation Long-Term Incentive Plan. All director nominees were elected and
proposals 2, 3 and 5 were approved. Item 4, which required approval of holders
11
<PAGE> 13
of at least 80% of the outstanding shares of Common Stock, was not approved. The
following table sets forth the results of the voting on the matters voted upon.
1. Election of Directors:
<TABLE>
<CAPTION>
Votes Votes
Nominees For Against Total
<S> <C> <C> <C>
Hugo E. Braun 4,861,878 253,039 5,114,917
Matthew S. Galvez 5,071,525 43,392 5,114,917
</TABLE>
<TABLE>
<CAPTION>
Votes Votes Broker
For Against Abstained Non-Votes Total
<S> <C> <C> <C> <C> <C>
2. Approval of issuance of additional shares of Common Stock:
2,942,863 87,387 12,011 2,072,656 5,114,917
3. Approval of amendment to the Article of Incorporation to increase number of
authorized shares of Common Stock:
4,946,733 107,234 7,827 53,123 5,114,917
4. Approval of amendment to the Article of Incorporation to declassify the Board
and reduce Board terms:
2,828,889 244,166 22,329 2,019,533 5,114,917
5. Approval of Long-Term Incentive Plan:
2,933,775 137,536 23,866 2,019,740 5,114,917
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herewith are set forth on the Index to Exhibits, which is
incorporated herein.
(b) The Company filed no reports on Form 8-K during the quarter ended June 30,
1999.
12
<PAGE> 14
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NEMATRON CORPORATION
BY:
AUGUST 10, 1999 /S/ MATTHEW S. GALVEZ
- ------------------------------- ------------------------------------------
DATE MATTHEW S. GALVEZ, PRESIDENT & COO
(DULY AUTHORIZED OFFICER)
AUGUST 10, 1999 /S/ DAVID P. GIENAPP
- ------------------------------- -------------------------------------------
DATE DAVID P. GIENAPP, EXECUTIVE VICE PRESIDENT -
FINANCE &ADMINISTRATION
(CHIEF ACCOUNTING OFFICER)
13
<PAGE> 15
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
- -------------- ----------------------
3.0 Certificate of Amendment to Articles of Incorporation
dated June 30, 1999
10.1 Employment Agreement, entered into effective October 1,
1998, by and between Matthew S.Galvez and the Company,
dated July 26, 1999
10.2 Nonqualified Stock Option Agreement between Matthew S.
Galvez and the Registrant entered into effective October
13, 1998
10.3 Nonqualified Stock Option Agreement between Matthew S.
Galvez and the Registrant entered into effective December
3, 1998
10.4 Third Amendment to Repayment Agreement and Sixth Amendment
to Loan Agreement as of April 23, 1999 by and between
KeyBank National Association and the Company, filed as
Exhibit 10.2 to the Registrant's Form 10-QSB for the
quarterly period ended March 31, 1999 and incorporated
herein by reference
27 Financial Data Schedule
14
<PAGE> 1
EXHIBIT 3.0
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
- --------------------------------------------------------------------------------
Date Received (For Bureau Use Only)
- ------------------------------ ----------------------------
[Ld 4A]
- ------------------------------ ---------------------------- -------------------
NAME Jin-Kyu Koh
- -------------------------------------------------------------------------------
ADDRESS Dykema Gossett PLLC 400 Renaissance Center
- -------------------------------------------------------------------------------
CITY Detroit STATE MI ZIP CODE 48243
- --------------------------------------------------------------------------------
</TABLE>
DOCUMENT WILL BE RETURNED TO NAME AND ADDRESS INDICATED ABOVE
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Profit and Nonprofit Corporations
Pursuant to the provision of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the
undersigned corporation executes the following Certificate:
1. The present name of the corporation is: Nematron Corporation
2. The corporation identification number (CID) assigned by the Bureau is:
333-652
3. The location of its registered office is: 5840 Interface Drive, Ann
Arbor, Michigan 48103
4. Articles III of the Articles of Incorporation are hereby amended and
restated to read as follows:
ARTICLE III
The total authorized capital stock is:
1. Common Stock: 30,000,000 shares.
2. A statement of all or any of the relative rights, preferences
and limitations of the shares of each class is as follows:
Subject to the preferences accorded the holders of
any other class of stock pursuant to these Articles of
Incorporation or action of the Board of Directors taken with
respect to such preferences, holders of Common Stock are
entitled to receive such dividends as may be declared by the
Board of Directors of the corporation from time to time and,
in the event of any liquidation, dissolution or winding up of
the corporation, the holders of Common Stock will be entitled
to receive pro rata all of the remaining assets of the
corporation available for distribution. Each issued and
outstanding share of Common Stock is entitled to one vote.
No holder of any shares of any class of stock of this
corporation shall have any preemptive or preferential right to
subscribe for, or to purchase, any part of a new or additional
issue of stock or any other reacquired shares of stock of any
class whatsoever or of any securities convertible into stock
of any class whatsoever, whether now or hereafter authorized
and whether issued for cash or other consideration.
1
<PAGE> 2
5. The foregoing amendment to the Articles of Incorporation was duly
adopted on the 6th day of April, 1999, by the shareholders at the
Annual Meeting of Shareholders. The necessary votes were cast in favor
of the amendment.
Signed this 30th day of June, 1999
By: /s/ Matthew S. Galvez
-------------------------------
(Signature of President, Vice
President, Chairperson or
Vice-Chairperson)
Matthew S.Galvez President
---------------------------------
(Type or Print Name) (Title)
Name of person or organization Preparer's name and business
remitting fees: telephone number:
- ----------------------------------- -----------------------------
Nematron Corporation Jin-Kyu Koh
5840 Interface Drive (313) 568-6627
Ann Arbor, Michigan 48103
- ----------------------------------- -----------------------------
2
<PAGE> 1
EXHIBIT 10.1
NEMATRON CORPORATION
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), entered into effective as
of October 1, 1998, by and between MATTHEW S. GALVEZ (hereinafter referred to as
"Executive") and NEMATRON CORPORATION, a Michigan corporation (hereinafter
referred to as the "Company").
W I T N E S S E T H :
WHEREAS, the Company is duly organized and operated under the laws of
the State of Michigan and is engaged in the business of developing computer
hardware and software; and
WHEREAS, Executive is currently employed by the Company and performs
the duties and responsibilities described herein; and
WHEREAS, the Company desires to continue the retention of Executive for
the position and to perform the duties and responsibilities described herein;
and
WHEREAS, parties desire to evidence the existing employment arrangement
of Executive and to enter into certain additional agreements as set for the
herein.
NOW THEREFORE, in consideration of the mutual covenants and conditions
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. SCOPE OF EMPLOYMENT. The Company agrees to continue to employ the
Executive and he agrees to continue employment with the Company for the term of
employment hereinafter defined. The duties of the Executive during the term of
the employment shall be that of President and Chief Executive Officer of the
Company, reporting directly to the Board of Directors of the Company. During the
term of employment, the Executive shall have the title of President and Chief
Executive Officer of the Company, and in such capacity shall have general charge
and supervision of the business and affairs of the Company, subject to the
directions of the Board of Directors of the Company.
2. TERM. "Term of Employment" as used herein shall mean the period from
October 1, 1998 (the "Commencement Date") through the Expiration Date. For
purposes of this Agreement, the "Expiration Date" shall mean December 31, 2001.
Notwithstanding anything to the contrary stated elsewhere herein, this Agreement
may be earlier terminated, as hereinafter set forth, in which event the term of
employment shall mean the period from the Commencement Date through the
effective date of such earlier termination. The term of employment shall be
terminated earlier upon: (i) the death of the Executive in the manner provided
in Section 6(a) hereof; (ii) the Executive becoming disabled in the manner
provided in Section 6(b) hereof; (iii) upon the Executive being discharged for
Cause in the manner provided in Section 6(c); (iv) upon the Executive
terminating his employment as provided in Section 6(d) hereof; or (v) upon the
Executive being discharged without Cause in the manner provided in Section 6(e).
3. COMPENSATION.
(a) SALARY. From the Commencement Date until April 15, 1999, the
Executive shall receive a salary at an annual rate of One Hundred Thirty-Two
Thousand Dollars ($132,000), payable in substantially equal semi-monthly
installments on the regular payroll dates of the Company. From April 16,
1
<PAGE> 2
1999 through the Expiration Date, the Executive's salary shall be increased to
the rate of Two Hundred Thousand Dollars ($200,000) per annum.
(b) PERFORMANCE BONUS. The Executive shall be entitled to a one-time
performance bonus of Fifty Thousand Dollars ($50,000) at such time as the
Company shall have first achieved any three consecutive months of positive net
income before taxes as determined pursuant to generally accepted accounting
principles. The Executive shall be entitled to additional Performance Bonuses
along with other executives based on the achievement of targeted return on net
investment goals at times and in amounts determined by the Board of Directors.
(c) COMMON STOCK BENEFIT PLANS. The Executive shall be eligible to
participate in the Company's stock compensation plans to the same extent as the
Company's other officers.
(d) OTHER BENEFITS. The Executive shall be entitled to participate in
any pension, group insurance, medical, hospitalization or other benefit plan
hereafter adopted by the Company applicable to officers or employees or, at the
Executive's option with respect to any or all such benefits, cash payments in
lieu thereof equal to the Company's cost for such benefit. In addition, the
Company shall maintain transferable term life insurance with a beneficiary named
by Executive in an amount equal to the difference between the benefits under the
Company's group insurance policy and twice the Executive's $200,000 annual base
salary. The obligation of the Company to obtain such life insurance shall be
contingent upon Executive successfully completing any physical examination
required by the provider of such life insurance. Upon termination of the
Executive's employment, ownership of such life insurance policy shall be
transferred to the Executive and the Executive shall thereafter be responsible
for all premium payments. The Executive shall be entitled to receive four (4)
weeks of paid vacation during each calendar year of the term of this Agreement.
All vacation must be taken during the calendar year for which it is awarded. The
Executive shall be entitled to receive reimbursement of actual automobile
expenses of up to Six Hundred Dollars ($600) per month and, for so long as
Executive's salary continues at the $132,000 base level described in Section
3(a) above, the Executive shall receive reimbursement of reasonable living and
commuting travel expenses, pursuant to expense reports filed monthly on a timely
basis for approval by the Chairman of the Compensation Committee of the Board of
Directors.
4. REIMBURSEMENT FOR EXPENSES; INDEMNIFICATION. The Company shall
reimburse the Executive for reasonable expenses incurred in carrying out his
duties under this Agreement and promoting the business of the Company. The
Company shall make reimbursement no later than the last day of each month for
all such expenses incurred by the Executive during the preceding month, pursuant
to expense reports filed monthly with the Company and approved by another
Company officer. The Company agrees to defend, indemnify and hold harmless the
Executive from and against any and all costs, expenses, judgments, awards,
settlements, or other adverse financial results, including the cost of defense
and appeal thereof, arising out of or in connection with any claims or
threatened claims against the Executive arising from his conduct or duties on
behalf of the Company, to the full extent permitted by law and the Company's
bylaws.
5. CONFIDENTIALITY; NON-COMPETITION; NON-SOLICITATION.
(a) The Executive agrees that any and all confidential knowledge or
information concerning the Company, its affiliates, its subsidiaries, and their
affairs' obtained by him in the course of his employment will be held inviolate
and confidential by him and that he will not disclose the same to any and all
other persons, including but not limited to, competitors and potential
competitors, unless required to do so by law or by legal process.
(b) The Executive agrees that upon termination of his employment, he
will immediately surrender and turn over to the Company all books, forms,
records, customer lists and all other papers, writings and all other property
belonging to the Company.
(c) For a period of two (2) years following termination of this
Agreement pursuant to sections 6(b), 6(c) or 6(d), Executive shall not seek or
otherwise obtain employment as an employee, officer, director, consultant or
otherwise, with any business enterprise that is or seeks to be in the business
of development or sale of computer hardware or software products or services in
direct competition with the Company. This provision shall not survive a Change
in Control of the Company, where "Change in Control" shall mean the sale or
merger of the Company or substantially all of the
2
<PAGE> 3
Company's assets to any entity not controlled at least 50% by the
shareholders of the Company prior to such sale or merger, provided that Change
in Control shall in no event be deemed to include the private placement
transactions that occurred in December 1998 and April 1999, nor to increases in
capitalization of the business through subsequent private placements or
secondary public offerings of the Company's capital stock, unless directly
related to such sale or merger.
(d) For a period of two (2) years following termination of this
Agreement pursuant to sections 6(b), 6(c) or 6(d), Executive shall not seek,
directly or indirectly, the employment of any person employed by the Company at
the time of termination or expiration or for the one-year period thereafter, or
cause any such employee to terminate his/her employment with the Company. The
provisions of this Section 5 shall survive the termination of this Agreement.
6. DEATH; DISABILITY; TERMINATION. The Executive's employment hereunder
may be terminated without any breach of this Agreement only under the following
circumstances:
(a) DEATH. The Executive's employment hereunder shall terminate
immediately upon his death.
(b) DISABILITY. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his duties
hereunder for sixty (60) consecutive business days, or one hundred fifty (150)
days in the aggregate during any twelve (12) month period, and within five (5)
days after written notice of termination is given (which may occur before or
after the end of such sixty (60) day or one hundred fifty (150) day period, as
the case may be) shall not have returned to the performance of his duties
hereunder, the Company may terminate the Executive's employment hereunder.
During any period that the Executive fails to perform his duties hereunder as a
result of incapacity due to physical or mental illness, the Executive shall
continue to receive his full salary, until the Executive returns to his duties
or until the Executive's employment is terminated pursuant to Section 6(b) or
6(d) hereof.
(c) TERMINATION FOR CAUSE. The Company may terminate the Executive's
employment hereunder for Cause, effective on the date of notice. For purposes of
this Agreement, the Company shall have "Cause" to terminate the Executive's
employment hereunder only in the following events: (i) Executive's fraud, (ii)
Executive's embezzlement from the Company, (iii) Executive's repeated willful
disregard of the business and affairs of the Company after due notice and time
to correct the deficiency which materially and adversely affects the business or
affairs of the Company; and (iv) conviction after final appeal for any felony or
for any criminal act involving fraud or moral turpitude. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to the Executive a copy of the
resolution, duly adopted and authorized by the affirmative vote of shares
representing at least eighty percent (80%) of the common stock of the Company
(excluding Executive's shares) at a meeting of the shareholders duly called and
held for such purpose.
(d) TERMINATION BY EXECUTIVE. The Executive may terminate his
employment by notice to the Company at any time by Executive giving Company not
less than ninety (90) days written notice, and provided that during such notice
period, Executive shall continue to provide employment services to Company on
the same basis as is contemplated in Section 1. In addition, during such notice
period the Executive shall actively participate in the recruitment and hiring of
a reasonably suitable replacement for the position of President of the Company.
Such termination shall be effective upon the expiration of the time period
specified in the Notice of Termination.
(e) TERMINATION WITHOUT CAUSE. The Company shall have the right, upon
provision of not less than sixty (60) days notice, to terminate the Executive
without Cause.
(f) NOTICE OF TERMINATION. Any termination of this Agreement by the
Company or the Executive (other than termination pursuant to (a) above) shall be
communicated by written Notice of Termination to the other party hereto. For
purposes of this Agreement, "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed
upon and shall set forth a basis for termination of the Executive's employment
under the provisions so indicated.
3
<PAGE> 4
(g) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated by his death, the date of his death, (ii)
if the Executive's employment is terminated pursuant to subsection (b) above,
fifteen (15) days after Notice of Termination is given (provided that the
Executive shall not have returned to the performance of his duties on a full
time basis during such fifteen (15) day period), (iii) if the Executive's
employment is terminated pursuant to subsection (c) the date on which a Notice
of Termination is given, and (iv) if the Executive's employment is terminated
pursuant to subsection (d) or (e) above, the date specified in the Notice of
Termination.
(h) COMPENSATION UPON TERMINATION.
(i) If the employment of the Executive is terminated pursuant to
Section 6(a) by reason of his death, the Company agrees to pay directly to his
surviving spouse, or if his spouse does not survive him, to the legal
representative of his estate, a lump sum equal to the sum of (i) any payment the
Executive's spouse, beneficiaries, or estate may be entitled to receive pursuant
to any pension or employee benefit plan or life insurance policy then maintained
by the Company on his behalf, (ii) the Executive's full salary through the Date
of Termination at the rate in effect at the time of the Executive's death, plus
compensation at the Executive's then current salary level for any vacation time
accrued but not yet taken, plus expense reimbursements and any other payments to
which he may be entitled pursuant to any retirement plan, health insurance,
and/or disability plan provided by the Company, and (iii) the pro rated amount
of the Performance Bonus based on the Company's annualized performance for the
year up until the Executive's date of death, and provided that such Performance
Bonus is actually earned in accordance with the provisions of this Agreement.
Such payments shall fully discharge the Company's obligations hereunder,
excluding the Executive's rights under any stock options and other stock-based
awards.
(ii) If the employment of the Executive is terminated pursuant to
Section 6(b) the Executive shall be paid, in substantially equal monthly
installments, sixty percent (60%) of his then current base salary at the rate
then in effect at the time of the Notice of Termination for a period commencing
on the Date of Termination until the Expiration Date; provided, however, (i) if
the Company has a disability plan for employees in which Executive is eligible
to participate, or (ii) if the Executive is deemed by a competent authority to
be eligible for statutory worker's compensation or disability payments, the
amount of the payments required to be made hereunder shall be reduced by the
aggregate amount of any payments received by the Executive therefrom up to the
end of the term of this Agreement. Additionally, the Executive shall receive his
full salary through the Date of Termination at the rate in effect at the time of
the Notice of Termination is given, plus compensation at the Executive's then
current Salary level for any vacation time accrued but not yet taken, plus
expense reimbursements and any other payments to which he may be entitled
pursuant to any retirement plan, health insurance, and/or disability plan
provided by the Company. The Company shall also pay to the Executive the pro
rated amount of the Performance Bonus, based on the Company's annualized
performance for the year up until the Executive's Notice of Termination,
provided that such Performance Bonus is actually earned in accordance with the
provisions of this Agreement and with the terms and conditions established in
the bonus plan. Such payments shall fully discharge the Company's obligations
hereunder, excluding the Executive's rights under any stock options and other
stock-based awards.
(iii) If the Company terminates the Executive pursuant to Section
6(c) for Cause, the Company shall pay the Executive his full salary through the
Date of Termination at the rate then in effect at the time of the Notice of
Termination is given, plus compensation at the Executive's then current salary
level for any vacation time accrued but not yet taken, plus expense
reimbursements and similar amounts accrued and unpaid as of the Date of
Termination, and the Company shall have no further obligations to the Executive
under this Agreement, excluding the Executive's rights under any stock options
and other stock-based awards.
(iv) If the Executive terminates his employment pursuant to Section
6(d), the Company shall pay the Executive his full salary through the Date of
Termination at the rate in effect at the time of the Notice of Termination is
given, plus compensation at the Executive's then current salary level for any
vacation time accrued but not yet taken, plus expense reimbursements and similar
amounts accrued and unpaid as of the Date of Termination, and the Company shall
have no further obligations to the Executive under this Agreement, excluding the
Executive's rights under any stock options and other stock-based awards. At any
time after receipt of a Notice of Termination pursuant to Section 6(d), the
Company may, at its sole discretion, accelerate the Date of Termination,
provided that notwithstanding such acceleration, the Executive shall be entitled
to receive his regular compensation and benefits through the original Date of
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<PAGE> 5
Termination set forth in the Notice of Termination or until he begins
employment elsewhere, whichever occurs first.
(v) If the Company terminates the Executive's employment other than
pursuant to Sections 6(a), 6(b) or 6(c) hereof (it being understood that a
purported termination pursuant to Section 6(b) or 6(c) hereof which is disputed
and finally determined not to have been proper shall be a termination in breach
of this Agreement), then the Executive (or his estate or heirs as the case may
be) shall be entitled to receive (i) a lump sum amount equal to all compensation
earned through the Date of Termination, including all accrued and unpaid salary
at the rate then in effect at the time of Notice of Termination, plus
Performance Bonus based on the Company's annualized performance through the Date
of Termination, expense reimbursements and similar amounts accrued and unpaid as
of the Date of Termination, plus compensation at the Executive's then current
salary level for any vacation time accrued but not yet taken, and (ii) in
monthly installments on the first of each month in advance, an amount equal to
his then current monthly base salary for the longer of (a) one year or (b) until
the Expiration Date of this Agreement. The Company shall also pay to the
Executive, in lieu of the Performance Bonus, an amount, payable monthly, equal
to the average of the average of last two quarterly Performance Bonuses paid to
Executive prior to the Notice of Termination. Additionally, the Company shall
also maintain in full force and effect, for the continued benefit of the
Executive for the balance of his term of this Agreement, without giving effect
to his termination, all employee benefit plans, and programs in which the
Executive was entitled to participate immediately prior to the Date of
Termination, provided that the Executive's continued participation is possible
under the general terms and provisions of such plans and programs. The Company
shall have no further obligations to the Executive under this Agreement,
excluding the Company's obligation, if any, under any stock options and other
stock-based awards.
(vi) Notwithstanding anything to the contrary contained elsewhere in
this Agreement, any amount of payment which the Company may owe to the Executive
due to his termination shall be reduced by an amount equal to the amount of
money, if any, which the Executive may owe to the Company, including but not
limited to, loans and advances.
(vii) Absent a breach of this Agreement by the Company, the remedies
provided herein are the sole and exclusive remedies of Executive, and the
Company shall not be liable for any payments other than expressly set forth
herein.
7. INSURANCE. The Executive agrees that the Company may, although it
has no obligation to do so, procure and/or obtain insurance on his life in such
amounts as the Company may, in its sole and absolute discretion, determine and
name only the Company as the insured or loss payee. The Executive agrees that
upon request by the Company he will submit to a physical examination, will
truthfully answer all questions, provide all relevant information and execute
all applications and other documents which may be required in order to procure
such insurance.
8. CONDITION AND SURVIVAL OF THE AGREEMENT. In the event that the
Company shall at any time be merged or consolidated with any other corporation
or corporations or shall sell or otherwise transfer a substantial portion of its
assets to another entity, the provisions of this Agreement shall be binding upon
and inure to the benefit of the corporation or entity surviving or resulting
from such merger or consolidation or to which such assets shall be sold or
transferred.
9. NOTICES. Any notices or other communications required or permitted
hereunder shall be sufficiently given if sent by registered mail, postage
prepaid, a recognized nationwide airmail courier service or personal delivery
with a receipt to the last home address given by the Executive to the Company or
if to the Company at the Company's office, along with courtesy copies to Dykema
Gossett PLLC and Hewes, Gelband, Lambert & Dann, P.C., such notice or
communication shall be deemed to have been given as of the earlier of three (3)
business days after the date mailed or upon actual receipt.
10. CONSTRUCTION. This Agreement was executed in the State of Michigan and
shall be construed in accordance with and under the internal laws of the State
of Michigan.
11. SEVERABILITY. The conditions and provisions herein set forth shall be
severable, and if any condition or provision or portion thereof shall be held to
be invalid or unenforceable, then said condition or provision shall not in any
manner affect any other condition or provision and the remainder of this
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<PAGE> 6
Agreement and every paragraph thereof construed without regard to said invalid
condition or provision, shall continue in full force and effect.
12. ASSIGNMENT. This Agreement shall be binding upon the Executive, his
successors, administrators and assigns, provided however, that neither party
shall have the right to assign the Executive's rights and obligations with
respect to his actual employment duties without the prior written consent of the
other party, and that it may not be modified except in writing signed by both
the parties.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
between the parties hereto with respect to the subject matter hereof, and this
Agreement supersedes and renders null and void any and all other prior oral and
written agreements, understandings or commitments pertaining to the subject
matter hereof.
IN WITNESS WHEREOF, the parties hereto have affixed their respective
signatures the day and year first above written.
NEMATRON CORPORATION
By: /s/ David P. Gienapp
----------------------
Print Name: David P. Gienapp
----------------------
Title: Secretary
----------------------
Executive: /s/ Matthew S. Galvez
----------------------
MATTHEW S. GALVEZ
----------------------
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<PAGE> 1
EXHIBIT 10.2
NONQUALIFIED STOCK OPTION AGREEMENT
NEMATRON CORPORATION
THIS AGREEMENT is entered into effective as of October 13, 1998 by and
between Nematron Corporation ("Corporation") and Matthew S. Galvez ("Optionee").
The Corporation hereby grants to the Optionee a stock option to purchase shares
of the Corporation's common stock, no par value (the "Common Stock"), subject to
the terms and conditions hereinafter provided below (the "Option"). The Option
is not an incentive stock option as defined in Section 422 of the Internal
Revenue Code of 1986.
1. Option Grant. Optionee is hereby granted an option to purchase
200,000 shares of Common Stock at $0.75 per share. The Option shall be
exercisable upon Optionee's execution of this Agreement.
2. Terms of Exercise.
(a) Exercise. The Option may be exercised at any time, or from time
to time, in whole or in part, from the time it first becomes exercisable as
provided in Section 1 hereof until the Expiration Date (as defined in Section
2(b) hereof) unless such Option is earlier terminated pursuant to Section 3
hereof. Upon proper exercise of the Option, the Corporation shall promptly cause
to be issued to the Optionee certificates for the Common Stock purchased upon
such exercise, subject to Section 8 of this Agreement.
(b) Expiration. Any provision of this Agreement to the contrary
notwithstanding, the Option shall expire and no longer be exercisable after the
date which is the tenth (10th) anniversary of the date of this Agreement (the
"Expiration Date").
(c) Notice. The Option shall be exercisable by delivery to the
Secretary of the Corporation of a written and duly executed notice in the form
attached hereto.
(d) Payment Terms. Payment of the full purchase price of any shares
with respect to which the Option is being exercised shall accompany the notice
of exercise of the Option. Payment shall be made (i) in cash, (ii) by certified
check, bank draft or money order, (iii) by tendering to the Corporation shares
of Common Stock then owned by Optionee, duly endorsed for transfer or with duly
executed stock power attached, which shares shall be valued at their "Fair
Market Value", or by directing the Corporation to withhold shares having a
"Fair Market Value" equal to the aggregate exercise price from the number of
shares which otherwise would be acquired upon exercise and deeming the Option to
have been exercised with respect to such withheld shares as well as the shares
actually acquired upon such exercise, or (iv) by delivery to the Corporation of
a properly executed exercise notice, acceptable to the Corporation, together
with irrevocable instructions to Optionee's broker to deliver to the Corporation
a sufficient amount of cash to pay the exercise price and any applicable income
and employment withholding taxes in accordance with a written agreement
between the Corporation and the brokerage firm if, at the time of exercise, the
Corporation has entered into such an agreement. "Fair Market Value" shall mean
the average of the high and low sale prices per share of the Common Stock
reported in the Wall Street Journal (or if high and low sale
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prices are not reported, the last sale price reported in the Wall Street Journal
or, if the last sale price is not reported, the last reported bid price per
share) for the last preceding day on which the Common Stock was traded prior to
the date with respect to which the Fair Market Value is to be determined, as
determined by the Committee in its sole and reasonable discretion; provided that
in the event the last preceding day on which the Common Stock was traded is
greater than 10 trading days prior to the date with respect to which the Fair
Market Value is to be determined, the Committee, in its good faith reasonable
discretion, shall determine the Fair Market Value of the Common Stock.
3. Termination of Employment.
(a) Termination Prior to Option Becoming Exercisable. If, prior to
the date that the Option shall first become exercisable, the Optionee's
employment with the Corporation and its subsidiaries shall be terminated, with
or without cause, or by the act, death or Disability (as defined in Section
22(e) of the Internal Revenue Code of 1986, as amended) of the Optionee, the
Optionee's right to exercise the Option shall terminate and all rights hereunder
shall cease.
(b) Termination Other Than Because of Death or Disability After
Option Becomes Exercisable. If, on or after the date that the Option shall first
become exercisable, the Optionee's employment with the Corporation and its
subsidiaries shall be terminated for any reason other than death or Disability,
the Optionee shall have the right, until the Expiration Date, to exercise the
Option to the extent that it was exercisable and is unexercised on the date of
such termination of employment, subject to any other limitation on the exercise
of the Option in effect at the date of exercise. The Option shall thereafter
terminate and no longer be of any effect.
(c) Termination Because of Death or Disability After Option Becomes
Exercisable. If, on or after the date that the Option shall have become
exercisable, the Optionee shall die or become Disabled while an employee of the
Corporation or any of its subsidiaries and while the Option remains exercisable,
the Optionee or the executor or administrator of the estate of the Optionee (as
the case may be), or the person or persons to whom the Option shall have been
transferred (if such transfer was made in compliance with Section 7 of this
Agreement), shall have the right, until the Expiration Date, to exercise the
Option to the extent that it was exercisable and unexercised on the date of
death or termination, subject to any other limitation on exercise in effect at
the date of exercise. The Option shall thereafter terminate and no longer be of
any effect.
4. Authority. The Corporation represents and warrants that the person
signing this Agreement on its behalf has the requisite authority to execute this
Agreement.
5. Withholding. The Optionee consents to withholding from his
compensation of all applicable payroll and income taxes with respect to the
Option. If the Optionee is no longer employed by the Corporation or its
subsidiaries at the time any applicable taxes with respect to the Option are due
and must be remitted by the Corporation, the Optionee agrees to pay applicable
taxes to the Corporation, and the Corporation may delay issuance of a
certificate until proper payment of such taxes has been made by the Optionee.
6. Rights as Shareholder. The Optionee shall have no rights as a
shareholder of the Corporation with respect to any of the shares covered by the
Option until the issuance of a stock
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<PAGE> 3
certificate or certificates upon the exercise of the Option, and then only with
respect to the shares represented by such certificate or certificates. No
adjustment shall be made for dividends or other rights with respect to such
shares for which the record date is prior to the date the option with respect to
such shares is exercised.
7. Non-Transferability of Option. The Option shall not be transferred
in any manner other than by will or the laws of descent and distribution. During
the lifetime of the Optionee, the Option shall be exercised only by the
Optionee. No transfer of the Option shall be effective to bind the Corporation
unless the Corporation shall have been furnished with written notice thereof and
such evidence as the Corporation may deem necessary to establish the validity of
the transfer and the acceptance by the transferee of the terms and conditions of
the Option.
8. Compliance with Securities, Tax and Other Laws.
(a) Anything to the contrary herein notwithstanding, the
Corporation's obligation to sell and deliver Common Stock pursuant to the
exercise of the Option is subject to such compliance with federal and state
laws, rules and regulations applying to the authorization, issuance or sale of
securities as the Corporation reasonably deems necessary or advisable. The
Corporation shall not be required to sell and deliver Common Stock if counsel
for the Corporation reasonably determines (i) that the issuance or transfer of
such shares will violate any of the provisions of the Securities Act of 1933 or
the Securities Exchange Act of 1934, or the rules and regulations promulgated
thereunder or those of the Nasdaq Stock Market or any stock exchange on which
the Common Stock may be listed, or the provisions of any state laws governing
the sale of securities, or (ii) that there has not been compliance with the
provisions of such acts, rules, regulations and laws. As a condition to exercise
of the Option, the Corporation may require the Optionee, or any person acquiring
the right to exercise the Option, to make any representation or warranty that
the Corporation reasonably deems to be necessary under any applicable
securities, tax, or other law or regulation. The Corporation shall promptly take
all actions necessary to bring itself into compliance with such laws and
regulations.
(b) The Compensation Committee of the Corporation's Board of
Directors (the "Committee") may impose such restrictions on any shares of Common
Stock acquired pursuant to the exercise of the Option as it may deem reasonably
advisable, including, without limitation, restrictions (i) under applicable
federal securities laws, (ii) under the requirements of the Nasdaq Stock Market
or any stock exchange or other recognized trading market upon which such shares
of Common Stock are then listed or traded, and (iii) under any blue sky or state
securities laws applicable to such shares. No shares shall be issued if counsel
for the Corporation determines that the Corporation has not complied with all
requirements under appropriate securities laws.
(c) The Optionee represents that, unless a registration statement
under the Securities Act of 1933 is in effect with respect to the shares of
Common Stock acquired upon exercise of the Option, all of such shares will be
acquired solely for his own account, for investment purposes and not with a view
to any further sale or distribution thereof. All certificates representing
any shares acquired upon exercise of the Option shall have endorsed thereon the
following legends:
(i) "THE SHARES EVIDENCED HEREBY HAVE NOT BEEN
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REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY
NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH SUCH LAWS."
(ii) Any legend required to be placed thereon under any
applicable state or federal securities law or any other agreement to which the
Optionee and the Corporation may be a party.
(d) Registration of Shares. The Corporation shall maintain an
effective registration statement on Form S-8 under the Securities Act of 1933,
as amended, with respect to the shares of Common Stock that may be purchased
upon exercise of the Option.
9. Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, Common Stock, other securities, or other
property), recapitalization, stock split, reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, or exchange
of Common Stock or other securities of the Corporation, issuance of warrants or
other rights to purchase Common Stock or other securities of the Corporation, or
other similar corporate transaction or event affects the Common Stock such that
an adjustment or expansion is required in order to prevent dilution or
enlargement of the benefits or potential benefits made available by the grant of
the Option, the Company shall adjust, in such manner as is equitable, the number
and type of shares of Common Stock subject to the Option and/or the exercise
prices of the Option, in order to prevent dilution or expansion of such
benefits; provided, however, that any such adjustment shall provide for the
elimination of any fractional share which might otherwise become subject to the
Option.
10. No Right to Employment. The granting of the Option does not confer
upon the Optionee any right to be retained as an employee of the Corporation.
11. Notices. Every notice relating to this Agreement shall be in
writing and if given by mail shall be given by registered or certified mail with
return receipt requested. All notices to the Corporation shall be sent or
delivered to the Secretary of the Corporation at the Corporation's headquarters.
All notices by the Corporation to the Optionee shall be delivered to the
Optionee personally or addressed to the Optionee at the Optionee's last
residence address as then contained in the records of the Corporation or such
other address as the Optionee may designate. Either party by notice to the other
may designate a different address to which notices shall be addressed. Any
notice given by the Corporation to the Optionee at the Optionee's last
designated address shall be effective to bind any other person who shall acquire
rights hereunder.
12. Disputes. Any dispute or disagreement which may arise under or as a
result of this Agreement shall be determined arbitration conducted pursuant to
the rules of the American Arbitration Association in Ann Arbor, Michigan and any
determination by the arbitrator shall be final and binding for all purposes and
on all persons, and shall be enforceable by any court of proper jurisdiction
over the parties.
13. Miscellaneous. The validity, construction and sufficiency of
performance under this Agreement shall be governed by the internal laws of the
State of Michigan. This is the entire
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<PAGE> 5
agreement between the parties as to the subject matter herein and this Agreement
may not be modified except in writing signed by both parties hereto.
IN WITNESS WHEREOF, the Corporation, by its duly authorized officer,
and the Optionee have executed this Agreement effective as of the day and year
first written above.
NEMATRON CORPORATION
By: /s/ David P. Gienapp
-------------------------
Its: Secretary
-------------------------
OPTIONEE
/s/ Matthew S. Galvez
-----------------------------
Matthew S. Galvez
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<PAGE> 6
NOTICE OF EXERCISE OF NONQUALIFIED STOCK OPTION
Secretary
Nematron Corporation
5840 Interface Drive
Ann Arbor, Michigan 48103
An Option was granted to me as of October 13, 1998 to purchase
shares of Common Stock to purchase 200,000 shares of Common Stock at $0.75 per
share.
I hereby elect to exercise the Option with respect to shares.
Payment of the $ aggregate exercise price is being made in the form
of cash, certified check, bank draft or money order delivered with this notice.
I represent that, if a registration statement under the
Securities Act of 1933 is not in effect with respect to the shares of Common
Stock I am acquiring pursuant to this notice of exercise, such shares are being
acquired solely for my own account, for investment purposes and not with a view
to any further sale or distribution thereof.
The stock certificate for the shares acquired upon exercise
should be issued to:
(name)
-------------------------------------
(address)
----------------------------------
-------------------------------------------
(Social Security No.)
----------------------
Dated: ,
--------------------
Matthew S. Galvez
6
<PAGE> 1
EXHIBIT 10.3
NONQUALIFIED STOCK OPTION AGREEMENT
NEMATRON CORPORATION
THIS AGREEMENT is entered into effective as of December 3, 1998 by and
between Nematron Corporation ("Corporation") and Matthew S. Galvez ("Optionee").
The Corporation hereby grants to the Optionee a stock option to purchase shares
of the Corporation's common stock, no par value (the "Common Stock"), subject to
the terms and conditions hereinafter provided below (the "Option"). The Option
is not an incentive stock option as defined in Section 422 of the Internal
Revenue Code of 1986.
1. Option Grant. Optionee is hereby granted an option to purchase
460,000 shares of Common Stock at $0.75 per share. The Option shall be
exercisable on the later of (a) approval by shareholders of the Corporation of
the issuance of shares of Common Stock pursuant to the payment or conversion of
the convertible promissory notes of the Corporation issued as of December 1,
1998 and the issuance of the shares of Common Stock pursuant to the
Corporation's April 1999 private placement or (b) Optionee's execution of this
Agreement.
2. Terms of Exercise.
(a) Exercise. The Option may be exercised at any time, or from
time to time, in whole or in part, from the time it first becomes exercisable as
provided in Section 1 hereof until the Expiration Date (as defined in Section
2(b) hereof) unless such Option is earlier terminated pursuant to Section 3
hereof. Upon proper exercise of the Option, the Corporation shall promptly cause
to be issued to the Optionee certificates for the Common Stock purchased upon
such exercise, subject to Section 8 of this Agreement.
(b) Expiration. Any provision of this Agreement to the contrary
notwithstanding, the Option shall expire and no longer be exercisable after the
date which is the tenth (10th) anniversary of the date of this Agreement (the
"Expiration Date").
(c) Notice. The Option shall be exercisable by delivery to the
Secretary of the Corporation of a written and duly executed notice in the form
attached hereto.
(d) Payment Terms. Payment of the full purchase price of any
shares with respect to which the Option is being exercised shall accompany the
notice of exercise of the Option. Payment shall be made (i) in cash, (ii) by
certified check, bank draft or money order, (iii) by tendering to the
Corporation shares of Common Stock then owned by Optionee, duly endorsed for
transfer or with duly executed stock power attached, which shares shall be
valued at their "Fair Market Value" ", or by directing the Corporation to
withhold shares having a "Fair Market Value" equal to the aggregate exercise
price from the number of shares which otherwise would be acquired upon exercise
and deeming the Option to have been exercised with respect to such withheld
shares as well as the shares actually acquired upon such exercise, or (iv) by
delivery to the Corporation of a properly executed exercise notice, acceptable
to the Corporation, together with irrevocable instructions to Optionee's broker
to deliver to the Corporation a sufficient amount of cash to pay the exercise
price and any applicable income and employment withholding taxes in accordance
with a written agreement
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<PAGE> 2
between the Corporation and the brokerage firm if, at the time of exercise, the
Corporation has entered into such an agreement. "Fair Market Value" shall mean
the average of the high and low sale prices per share of the Common Stock
reported in the Wall Street Journal (or if high and low sale prices are not
reported, the last sale price reported in the Wall Street Journal or, if the
last sale price is not reported, the last reported bid price per share) for the
last preceding day on which the Common Stock was traded prior to the date with
respect to which the Fair Market Value is to be determined, as determined by the
Committee in its sole and reasonable discretion; provided that in the event the
last preceding day on which the Common Stock was traded is greater than 10
trading days prior to the date with respect to which the Fair Market Value is to
be determined, the Committee, in its good faith reasonable discretion, shall
determine the Fair Market Value of the Common Stock.
3. Termination of Employment.
(a) Termination Prior to Option Becoming Exercisable. If, prior to
the date that the Option shall first become exercisable, the Optionee's
employment with the Corporation and its subsidiaries shall be terminated, with
or without cause, or by the act, death or Disability (as defined in Section
22(e) of the Internal Revenue Code of 1986, as amended) of the Optionee, the
Optionee's right to exercise the Option shall terminate and all rights hereunder
shall cease.
(b) Termination Other Than Because of Death or Disability After
Option Becomes Exercisable. If, on or after the date that the Option shall first
become exercisable, the Optionee's employment with the Corporation and its
subsidiaries shall be terminated for any reason other than death or Disability,
the Optionee shall have the right, until the Expiration Date, to exercise the
Option to the extent that it was exercisable and is unexercised on the date of
such termination of employment, subject to any other limitation on the exercise
of the Option in effect at the date of exercise. The Option shall thereafter
terminate and no longer be of any effect.
(c) Termination Because of Death or Disability After Option
Becomes Exercisable. If, on or after the date that the Option shall have become
exercisable, the Optionee shall die or become Disabled while an employee of the
Corporation or any of its subsidiaries and while the Option remains exercisable,
the Optionee or the executor or administrator of the estate of the Optionee (as
the case may be), or the person or persons to whom the Option shall have been
transferred (if such transfer was made in compliance with Section 7 of this
Agreement), shall have the right, until the Expiration Date, to exercise the
Option to the extent that it was exercisable and unexercised on the date of
death or termination, subject to any other limitation on exercise in effect at
the date of exercise. The Option shall thereafter terminate and no longer be of
any effect.
4. Authority. The Corporation represents and warrants that the person
signing this Agreement on its behalf has the requisite authority to execute this
Agreement.
5. Withholding. The Optionee consents to withholding from his
compensation of all applicable payroll and income taxes with respect to the
Option. If the Optionee is no longer employed by the Corporation or its
subsidiaries at the time any applicable taxes with respect to the Option are due
and must be remitted by the Corporation, the Optionee agrees to pay applicable
taxes to the Corporation, and the Corporation may delay issuance of a
certificate until proper payment of such taxes has been made by the Optionee.
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<PAGE> 3
6. Rights as Shareholder. The Optionee shall have no rights as a
shareholder of the Corporation with respect to any of the shares covered by the
Option until the issuance of a stock certificate or certificates upon the
exercise of the Option, and then only with respect to the shares represented by
such certificate or certificates. No adjustment shall be made for dividends or
other rights with respect to such shares for which the record date is prior to
the date the option with respect to such shares is exercised.
7. Non-Transferability of Option. The Option shall not be transferred
in any manner other than by will or the laws of descent and distribution. During
the lifetime of the Optionee, the Option shall be exercised only by the
Optionee. No transfer of the Option shall be effective to bind the Corporation
unless the Corporation shall have been furnished with written notice thereof and
such evidence as the Corporation may deem necessary to establish the validity of
the transfer and the acceptance by the transferee of the terms and conditions of
the Option.
8. Compliance with Securities, Tax and Other Laws.
(a) Anything to the contrary herein notwithstanding, the
Corporation's obligation to sell and deliver Common Stock pursuant to the
exercise of the Option is subject to such compliance with federal and state
laws, rules and regulations applying to the authorization, issuance or sale of
securities as the Corporation reasonably deems necessary or advisable. The
Corporation shall not be required to sell and deliver Common Stock if counsel
for the Corporation reasonably determines (i) that the issuance or transfer of
such shares will violate any of the provisions of the Securities Act of 1933 or
the Securities Exchange Act of 1934, or the rules and regulations promulgated
thereunder or those of the Nasdaq Stock Market or any stock exchange on which
the Common Stock may be listed, or the provisions of any state laws governing
the sale of securities, or (ii) that there has not been compliance with the
provisions of such acts, rules, regulations and laws. As a condition to exercise
of the Option, the Corporation may require the Optionee, or any person acquiring
the right to exercise the Option, to make any representation or warranty that
the Corporation reasonably deems to be necessary under any applicable
securities, tax, or other law or regulation. The Corporation shall promptly take
all actions necessary to bring itself into compliance with such laws and
regulations.
(b) The Compensation Committee of the Corporation's Board of
Directors (the "Committee") may impose such restrictions on any shares of Common
Stock acquired pursuant to the exercise of the Option as it may deem reasonably
advisable, including, without limitation, restrictions (i) under applicable
federal securities laws, (ii) under the requirements of the Nasdaq Stock Market
or any stock exchange or other recognized trading market upon which such shares
of Common Stock are then listed or traded, and (iii) under any blue sky or state
securities laws applicable to such shares. No shares shall be issued if counsel
for the Corporation determines that the Corporation has not complied with all
requirements under appropriate securities laws.
(c) The Optionee represents that, unless a registration
statement under the Securities Act of 1933 is in effect with respect to the
shares of Common Stock acquired upon exercise of the Option, all of such shares
will be acquired solely for his own account, for investment purposes and not
with a view to any further sale or distribution thereof. All certificates
representing
3
<PAGE> 4
any shares acquired upon exercise of the Option shall have endorsed
thereon the following legends:
(i) "THE SHARES EVIDENCED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY
NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH SUCH LAWS."
(ii) Any legend required to be placed thereon under any
applicable state or federal securities law or any other agreement to which the
Optionee and the Corporation may be a party.
(d) Registration of Shares. The Corporation shall maintain an
effective registration statement on Form S-8 under the Securities Act of 1933,
as amended, with respect to the shares of Common Stock that may be purchased
upon exercise of the Option.
9. Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, Common Stock, other securities, or other
property), recapitalization, stock split, reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, or exchange
of Common Stock or other securities of the Corporation, issuance of warrants or
other rights to purchase Common Stock or other securities of the Corporation, or
other similar corporate transaction or event affects the Common Stock such that
an adjustment or expansion is required in order to prevent dilution or
enlargement of the benefits or potential benefits made available by the grant of
the Option, the Company shall adjust, in such manner as is equitable, the number
and type of shares of Common Stock subject to the Option and/or the exercise
prices of the Option, in order to prevent dilution or expansion of such
benefits; provided, however, that any such adjustment shall provide for the
elimination of any fractional share which might otherwise become subject to the
Option.
10. No Right to Employment. The granting of the Option does not confer
upon the Optionee any right to be retained as an employee of the Corporation.
11. Notices. Every notice relating to this Agreement shall be in
writing and if given by mail shall be given by registered or certified mail with
return receipt requested. All notices to the Corporation shall be sent or
delivered to the Secretary of the Corporation at the Corporation's headquarters.
All notices by the Corporation to the Optionee shall be delivered to the
Optionee personally or addressed to the Optionee at the Optionee's last
residence address as then contained in the records of the Corporation or such
other address as the Optionee may designate. Either party by notice to the other
may designate a different address to which notices shall be addressed. Any
notice given by the Corporation to the Optionee at the Optionee's last
designated address shall be effective to bind any other person who shall acquire
rights hereunder.
12. Disputes. Any dispute or disagreement which may arise under or as
a result of this Agreement shall be determined arbitration conducted pursuant to
the rules of the American Arbitration Association in Ann Arbor, Michigan and any
determination by the arbitrator shall be final and binding for all purposes and
on all persons, and shall be enforceable by any court of proper jurisdiction
over the parties.
4
<PAGE> 5
13. Miscellaneous. The validity, construction and sufficiency of
performance under this Agreement shall be governed by the internal laws of the
State of Michigan. This is the entire agreement between the parties as to the
subject matter herein and this Agreement may not be modified except in writing
signed by both parties hereto.
IN WITNESS WHEREOF, the Corporation, by its duly authorized officer,
and the Optionee have executed this Agreement effective as of the day and year
first written above.
NEMATRON CORPORATION
By: /s/ David P. Gienapp
----------------------------------------
Its: Secretary
---------------------------------------
OPTIONEE
/s/ Matthew S. Galvez
------------------------------------------
Matthew S. Galvez
5
<PAGE> 6
NOTICE OF EXERCISE OF NONQUALIFIED STOCK OPTION
Secretary
Nematron Corporation
5840 Interface Drive
Ann Arbor, Michigan 48103
An Option was granted to me as of December 3, 1998 to purchase
shares of Common Stock to purchase 460,000 shares of Common Stock at $0.75 per
share.
I hereby elect to exercise the Option with respect to shares.
Payment of the $ aggregate exercise price is being made in the form
of cash, certified check, bank draft or money order delivered with this notice.
I represent that, if a registration statement under the
Securities Act of 1933 is not in effect with respect to the shares of Common
Stock I am acquiring pursuant to this notice of exercise, such shares are being
acquired solely for my own account, for investment purposes and not with a view
to any further sale or distribution thereof.
The stock certificate for the shares acquired upon exercise
should be issued to:
(name)
--------------------------------------
(address)
-----------------------------------
--------------------------------------------
(Social Security No.)
-----------------------
Dated: , --------------------------------
-------- ---- Matthew S. Galvez
6
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 90,074
<SECURITIES> 0
<RECEIVABLES> 3,151,572
<ALLOWANCES> 142,000
<INVENTORY> 1,699,337
<CURRENT-ASSETS> 5,277,679
<PP&E> 2,868,412
<DEPRECIATION> 5,889,994
<TOTAL-ASSETS> 12,589,157
<CURRENT-LIABILITIES> 5,207,082
<BONDS> 1,807,067
0
0
<COMMON> 28,707,838
<OTHER-SE> (9,817)
<TOTAL-LIABILITY-AND-EQUITY> 12,589,157
<SALES> 5,948,709
<TOTAL-REVENUES> 5,948,709
<CGS> 4,105,463
<TOTAL-COSTS> 1,510,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,516
<INCOME-PRETAX> 265,351
<INCOME-TAX> 10,800
<INCOME-CONTINUING> 276,351
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276,351
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
